Market bets blow in the windMarket bets blow in the wind
Traders watch the skies for investment clues as agency predicts nasty hurricane season
DAVID PARKINSON
From Thursday's Globe and Mail
May 24, 2007 at 6:19 AM EDT
As concerns about the coming U.S. hurricane season begin to intensify in financial markets, investors are lining up to place their bets - some more directly than others.
On Tuesday, the National Oceanic & Atmospheric Administration released its annual forecast for storms off the Atlantic coast, predicting a 75-per-cent probability of above-normal hurricane activity this season.
It forecast 13 to 17 named storms in the region between the start of June and the end of November, of which seven to 10 would develop into hurricanes. Three to five would be "major" hurricanes of Category 3 strength or higher, it predicted.
(The average season has 11 named storms of which become six hurricanes, two of them major. Last year's milder-than-expected season featured 10 storms of which five were hurricanes, while two reached Category 3 intensity; the only hurricane to hit the U.S. mainland, Ernesto, had been downgraded to a tropical storm by the time it reached the coast.)
Still, some of the key investment sectors whose fortunes are linked to the annual hurricane threat - such as energy, insurance and home improvement retailers - eased on the predictions, which, based on earlier private sector forecasts, could have been worse.
"They were below a lot of other forecasters," said energy analyst Kyle Cooper of IAF Advisors in Houston.
The hurricane outlook is a big deal to energy commodities, which face potentially serious supply disruptions if any major storms hit production, refining and pipeline facilities along the Gulf of Mexico.
Those facilities were pounded during the devastating hurricane season of 2005, and this year's stormy outlook, which was already widely anticipated even before the NOAA released its forecast, has already been cited as a factor in rising prices for energy futures in recent weeks.
Natural gas has had a particularly strong focus on the hurricane threat, because the fuel's limited transportation options mean any lost supplies can't be easily replaced from other sources. New York Stock Exchange natural gas futures are up almost 25 per cent from the same time a year ago, despite inventories that are more than 20 per cent higher than the five-year average.
That could be a risky bet, based on the lessons learned from last year - when the NOAA issued an above-average storm season forecast strikingly similar to this year's prediction.
Many speculators who counted on that forecast were stung badly when the weather fears fizzled and the commodity prices fell - most famously in the case of Brian Hunter, the Calgary-based trader whose $6-billion (U.S.) of bad bets in the natural gas futures market sunk his employer, U.S. hedge fund Amaranth Advisors LLC.
The Chicago Mercantile Exchange launched its CME-Carvill Hurricane Index futures and options in March. The products are based on an index that uses weather data, such as wind speed and storm radius, to approximate a storm's potential for damage.
"Following the devastating 2005 hurricane season that caused an estimated $79-billion in damage, it became apparent there was a limited capacity to insure customer claims," Felix Carabello, the CME's director of alternative investment products, said in the exchange's news release when it unveiled its hurricane products.
"With these contracts, insurers and others will be able to transfer their risks to the capital markets and thereby increase their capacity to insure their customers."
While the target customers are insurance companies, there is an online derivatives market offering a cheaper alternative that is aimed at retail investors. For a second successive year, the HedgeStreet Exchange (hedgestreet.com), a federally regulated alternative exchange, will offer $100 "binary contracts" on each named storm that has the potential to land on the U.S. mainland.
The contracts - similar to an over/under bet familiar to sports gamblers - allow traders to take positions on whether the insurable damages caused by the storm will be above or below a specific dollar value.
Will hurricanes cause a gas price spike?
NATURAL GAS
Yesterday's close (June) $7.752, down 0.049¢
2007 HURRICANE OUTLOOK
FOR ATLANTIC STORMS
75%: Above normal
20%: Near normal
5%: Below normal
Named storms: 13 - 17
Hurricanes: 7 - 10
Major hurricanes: 3 - 5
SOURCES: THOMSON DATASTREAM AND NATIONAL HURRICANE CENTRE
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